Shareholders Are Optimistic That Lululemon Athletica (NASDAQ:LULU) Will Multiply In Value

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Lululemon Athletica (NASDAQ:LULU) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Lululemon Athletica, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.40 = US$2.2b ÷ (US$7.1b - US$1.6b) (Based on the trailing twelve months to January 2024).

So, Lululemon Athletica has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Luxury industry average of 12%.

Check out our latest analysis for Lululemon Athletica

In the above chart we have measured Lululemon Athletica's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Lululemon Athletica .

What Does the ROCE Trend For Lululemon Athletica Tell Us?

Lululemon Athletica deserves to be commended in regards to it's returns. The company has employed 245% more capital in the last five years, and the returns on that capital have remained stable at 40%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Lululemon Athletica can keep this up, we'd be very optimistic about its future.

What We Can Learn From Lululemon Athletica's ROCE

In short, we'd argue Lululemon Athletica has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 75% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for LULU that compares the share price and estimated value.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.